AICD Chairman, Elizabeth Proust AO FAICD opened the Summit by discussing some of the challenges directors face in an increasingly complex world, business’ relationship with the community and the importance of business’ engagement with its stakeholders and society in general.

Elizabeth Proust AO FAICDChairman, Australian Institute of Company Directors

02 March 2017

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Ladies and Gentlemen,

Thank you for joining us at the Australian Governance Summit. This event is about directors and the unique challenges we face in carrying-out our roles as governors of many of the most important institutions in this country.

This year’s theme is directing in a complex environment. The increasing complexity of our world makes good governance and governance education more important than ever. I believe it’s fair to say that the model of how we govern is far more complex than it was in eras past. No longer is it enough to take a command and control approach, with a laser-like focus solely on delivering returns for shareholders or members.

Our stakeholders are both more numerous and more diverse than ever before …. and that means the practice of directorship is less straightforward than ever.

So what is driving this complexity and change? The Firm of the Future report, released by Bain & Co at this year’s World Economic Forum, identified four major forces which they believe are already shaping the future of the organisations that we govern today.

The first is the changing nature of the workforce, particularly millennials who are now the largest generational cohort in our organisations.

The second is the increasing complexity of large organisations themselves … which sometimes struggle to translate strategy … into execution.

The third is technology and the growing importance of speed over scale.

And finally they recognised the more challenging macro-environment … with more activist governments … a backlash against short-term thinking … and importantly … growing critiques of inequality and the role of the modern corporation in contributing to that inequality.

The way we do business is coming under pressure from these myriad sources, and perhaps more. These pressures apply to directors and executives of all types of organisations, not just those listed on the ASX.

Technologies, markets, customer and stakeholder expectations – even people’s sources of news – are changing rapidly. The ‘way we do business’ can’t be the way we’ve always done business. As directors – who are charged with taking the long view, of bringing the interests of the company as a whole to our thinking – we must lead the thinking to help organisations adapt and respond to this rapidly changing environment.

For example, as our world becomes increasingly digital, the number and type of channels we have to reach people has exploded. Yet simultaneously people are harder to engage with and inform than ever … with increasing demands on their time and attention, and an emerging tendency for people to access information from fewer, narrower sources.

And reaching people, informing them and engaging them is crucial for all organisations.

That’s partly because … business has never been more unpopular in the eyes of the community … governments have never been less trusted … even charities and not-for-profits are under increased attack with negative media articles about fundraising practices and administrative costs more common than ever.

The 2008 financial crisis, globalisation and technological change have come over the past decade in tsunami-like waves, weakening and breaking down people’s trust in institutions of all types.

People are uncertain about their futures … unsure whether their jobs will exist in 10 years’ time – much less the ones their children aspire to in 20 years’ time.

This is reflected in the 2017 Edelman Trust Barometer, which found that 53 percent of respondents believe the current overall system, which is to say the key institutions of government, business, media and not-for-profits, has failed them.

They believe it is unfair and offers little hope for the future. Indeed, only 15 percent believe the current way of doing things is working.

As business and community leaders, we need to understand those concerns and act with them in mind. There are no simple answers, but ignoring valid concerns and fears will only worsen the credibility and trustworthiness of the organisations we lead.

As directors we have a role to play in this conversation around growth, inequality and fairness. We recognise the importance of building trust and building confidence for our employees and shareholders; but we need to be creative and consistent in the way we listen to, and respond to other stakeholders in a way that builds and strengthens trust.

It is not reasonable or credible to grumble that government doesn’t listen to the needs of business, if business isn’t acting as a partner in helping find solutions. We cannot point to government and say the problems and concerns being shown on the streets, at the ballot box, indeed even at some AGMs, are government’s problems to solve alone.

As leaders in our respective businesses and organisations, we need to consider what is being said, and our response. Solutions need the engagement of all stakeholders, and to do that we need to take collective responsibility in hearing and addressing the valid frustrations and concerns that people share if we are to regain their trust.

At the AICD we too are grappling with this complexity and change; importantly how can we … as your directors’ institute … ensure that we are providing you with the research, knowledge, tools and education you need to grapple with change and complexity.

To that end we’ve increased our focus on technology and digital disruption. As the world has become increasingly digital, the importance of speed has increased dramatically. Those who can’t keep up fall by the wayside.

Our partnership with the CSIRO’s Data 61 is an example of one initiative we are undertaking to help equip members to identify the opportunities and risks of technology in a world that is constantly being disrupted … and you will see more information and education from the AICD in this space.

It’s not the only thing we are doing to bring world-class research and insights for our members. As the newest member of the World Economic Forum we will provide our members with invaluable access to the Forum’s people, publications and research, as well as a place at the table to debate important policy issues. We are one of only a few Australian members of the Forum, so membership also gives us an opportunity to view and shape global policy issues through a uniquely-Australian perspective.

We have also taken a different approach to issues of public policy that affect our members and society more broadly. As I said earlier, we all need to listen more and consider interests wider than our own. The AICD has not always done this; indeed we have been guilty in the past of acting like a directors’ union and not engaging on wider issues that impact our society and economy.

To be clear, we will still advocate strongly on any issues that hamper directors’ ability to achieve excellence in governance, including regulations which hurt good investment and business decisions. For example, we will continue to be active in calling for insolvency reform and fairer director liability laws. The current constrictive legal environment isn’t as effective as it could be and fails to achieve the best outcome for our economy. It actively works against directors taking calculated, responsible risks, and promotes short-term thinking over long-term priorities.

We will continue to be active in looking to have laws amended to assist directors in fulfilling their role, and because excellence in governance will make a positive contribution to our economy and society overall.

For our not-for-profit members, one of the ways we are doing this is through advocating for reform to the regulation of fundraising. Australia has seven different fundraising regimes; between them, they are burdensome, inconsistent and waste millions of dollars every year in compliance costs. Together with a coalition of leading sector bodies, we are advocating for state and territory governments to repeal their fundraising laws to create one nationally-consistent regulatory regime for fundraising under the Australian Consumer Law.

However, many of you will have seen negative press about the practices of fundraisers. Misspent money, dubious employment arrangements and aggressive face-to-face solicitations – sometimes referred to as charity muggers or chuggers – are undermining the community’s trust and confidence in the sector. If we are to advocate for less and more flexible regulation, it is incumbent on us – on directors and boards – to ensure and to demonstrate a level of ethical behaviour that can give confidence to the government and to the broader community. There is a balance to achieve – as leaders, we must show that we can be trusted to operate ethically in less prescriptive regulatory environments, or else risk being told, and perhaps rightly so, that we do not deserve to.

As part of this balance, we must also be active in areas where the legislative or regulatory framework isn’t achieving the best outcomes more broadly, even in areas where perhaps the current framework is skewed towards business interests unfairly or inappropriately.

One such area is whistleblowing. Australia’s corporate whistleblowing framework is narrow and weak … indeed it ranks among the worst in the OECD.

A framework, such as the one currently in place, which expects a whistleblower to be an expert in the Corporations Act, who knows exactly what types of disclosures are covered and under what circumstances, is simply not good enough …

… A framework that doesn’t cover former employees, isn’t good enough

… A framework that places more value on an individual’s motivations than the information they provide, isn’t good enough.

…. Such a framework provides inadequate encouragement for strong internal practices and woeful protections for those who call out wrongdoing, often risking their livelihood as a result.

It is in the interest of all directors that information about corporate wrongdoing is brought to light so that it can be addressed and, ideally, prevented. We should provide a whistleblowing framework that protects and encourages disclosures, within reason, and which incentivises internal disclosures. As an organisation, the AICD is focused on achieving good governance outcomes – and what better outcome is there for good governance than when an individual feels safe enough, empowered enough, to alert the board to actual or possible malfeasance or wrongdoing, with a view to creating a culture of disclosure. After all, the ultimate goal should be creating a corporate culture that facilitates the detection and indeed, the prevention of corporate wrongdoing.

Another area where we as directors can do more is business’ engagement with shareholders, particularly institutional investors.

Last year there were over 100 strikes against remuneration reports, and in many cases the weight of each strike was substantial, with some as high as 84 per cent against.

Of course, there are instances where those voting have refused to engage reasonably and ethically with companies. There are examples of errors or misinformation in proxy advisor reports that they are failing to correct once companies have engaged with them in good faith. We’re also very concerned with feedback we’ve received that at least one proxy advisory firm is refusing to engage with companies at all. Neither of these practices is good enough and be assured we are tackling those issues.

However, before calling for sweeping regulations or legislative overhaul, we owe it to ourselves to look at what is causing those strikes. It is naïve to think that there aren’t practices out there that have deserved a strike … Practices which are excessive, or unreasonable, that the board does have control over.

Do we need more corporate embarrassments, or front page stories, or examples of irresponsible decision making to know that there are issues within organisations that need to be addressed? That we need to reflect on the systems we as directors put in place and whether they’re achieving the good governance we strive for.

Reflecting on our own behaviour, and even if we find it be above board, considering how we can go further to rebuild trust with the investor community is something we all need to think about well ahead of next AGM season. It is inherent upon all stakeholders involved, retail investors, proxy advisors, institutional investors and boards, to do better – because better engagement will benefit us all.

One area in particular where there seems to have been a breakdown in communication and engagement is the topic of so-called ‘soft targets’. The blowtorch was put to them last AGM season … However, just because a board sets and remunerates on non-financial targets does not mean they are rewarding a CEO just for doing their job. The diversity of your workforce, your culture, and customer satisfaction are all areas which it is entirely appropriate for boards to recognise and remunerate.

The question is on the extent to which the target is stretched, not on whether the target is solely financial or not. There’s no doubt boards have received mixed messages in this area … whether it be from investors or politicians … but it is inherent upon boards to go out and argue for and champion the value of non-financial targets in our remuneration frameworks.

Finally, the AICD is also speaking with a louder voice on broader public policy areas, in particular the area of tax reform. Business doesn’t operate in a vacuum. So the sound of some business voices only arguing for a cut in corporate tax rates was, to put it lightly, rather naïve.

Calling for your own tax to be cut in isolation of the wider social and economic conversation about tax reform and how it can drive our economic prosperity does little to convince people of your cause. It does not help business regain the trust that it has lost in the community. In fact, it only serves to entrench a view within those who have lost faith in business that the business community doesn’t care about them and is only out for itself.

While we at the AICD believe the corporate tax rate in Australia is too high and that cutting it would help lift economic growth and boost our international competitiveness, we have advocated that any changes need to be made in the context of a comprehensive package of tax reform that treats people fairly, and that at its heart has three overarching objectives;

driving economic growth and prosperity;

improving fairness; AND

improving international competitiveness.

Tax cuts need to be part of a wider reform package, including changes to the GST and spending restraint, which addresses;

the structural problems that exist in our current taxation framework;

allows for inefficient taxes to be removed; AND

establishes a sustainable tax base to better fund our nation’s priorities now and into the future.

Tax reform is unfinished business in this country, and it should be done in a holistic manner that benefits a wide cross-section of our society – that is what business and directors should be arguing for.

The AICD will be doing just that later this month when we release our updated Blueprint for Growth: Governance of a Nation policy reform document – which among other matters of national policy import, will propose a plan for comprehensive national tax reform.

Now some will disagree with this broader, more inclusive approach. They will say if business doesn’t argue solely in its own interest, who will? I think the answer to that is, if business argues solely in its own interest … with no regard for the society in which it operates … who will listen to it?

As I said earlier, business does not operate in a vacuum. After all, society’s expectations change over time. Once upon a time diversity in the workplace was not an issue, much less diversity on boards. Over time however, society’s expectations changed, and it was no longer the norm to farewell a woman from the workplace once she married. This goes to show that as society’s expectations change, so must those of businesses and organisations. The choice is whether we are at the fore of those changes and help shape them, or forced by regulation or legislation to comply with them. The choice is being part of the conversation, or being shut out from it altogether.

We may accuse some politicians of being populist, but they are merely channeling societal fears and anger. If people don’t feel the economy or society is working for them, they will seek to change it – in whatever way they can.

So if we want to maintain the compact between business and the community that Australia has benefited from over the last 30 years, then business needs to accept its wider social obligation to fight for and maintain that consensus. If it does not, we risk having that consensus taken away by an angry and fed-up community.

We all need to continue to improve our dialogue with shareholders, with government and with the wider community.

There is no doubt that the areas I’ve spoken about are broad, but they all have an impact on us as directors, and more importantly, for the organisations we lead. We live and work in a complex world, and there’s every indication it will become increasingly complex.

As directors we need to grapple with this complexity and change, and be concerned about issues of national importance so that we can help to shift the dial for the benefit of our society. Only then can society’s institutions hope to gain back the faith they have lost.

Ladies and gentlemen, directorship is a privilege that brings with it a great responsibility. If we as the country’s leading directors can tackle an increasingly complex world, and take advantage of the emerging challenges and opportunities it brings rather than let it overtake and overwhelm us … we will ensure the organisations we oversee not only succeed … but contribute more broadly to our nation’s economic and social prosperity …

… Please, everyone enjoy today and tomorrow … and I look forward to participating in this event with each of you here.

The Australian Institute of Company Directors is committed to excellence in governance. We make a positive impact on society and the economy through governance education, director development and advocacy.